Tech News & Commentary

Netflix pays to play on Comcast's broadband network

After publicly supporting net neutrality, Netflix (NFLX) on Sunday revealed that it had caved to U.S. cable giant Comcast (CMCSA) and signed a multiyear agreement that gives it a "more direct connection" to Comcast's network.

Financial terms weren't disclosed. Described as a "mutually beneficial interconnection agreement," the deal will provide Netflix customers using Comcast broadband Internet service "a high-quality Netflix video experience for years to come," the companies said in a joint press release .

In a letter to shareholders, Netflix CEO Reed Hastings and CFO David Wells said Netflix customers would rise up if cable companies tried to throttle the bandwidth used by over-the-top Internet video services like Netflix. They made the comments in response to a U.S. appeals court victory by Verizon Communications (VZ) in January that struck down the Federal Communications Commission's net neutrality policy.

"In principle, a domestic (ISP) now can legally impede the video streams that members request from Netflix, degrading the experience we jointly provide," Hastings and Wells wrote. "The motivation could be to get Netflix to pay fees to stop this degradation. Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver."

Netflix has now moved to avert that potential situation with Comcast, though the companies insist that "Netflix receives no preferential network treatment under the multiyear agreement."

Netflix stock was up more than 3% in midday trading in the stock market today, above 445, touching an all-time high for the fifth day in the past six trading days. Comcast stock was up more than 1%.

FBR analyst Barton Crockett said the Netflix-Comcast deal is "intriguing" because it "marks the first such agreement Netflix has announced." It opens the door for more such deals with ISPs.

Netflix likely negotiated favorable terms with Comcast because the issue of its treatment by the cable giant could have disrupted Comcast's planned purchase of Time Warner Cable (TWC), Crockett said in a research note Monday.

"If Comcast had persisted in meaningfully degrading Netflix's video performance, we think Netflix could have used this as a wedge issue to drive regulator opposition to Comcast's proposed Time Warner Cable acquisition, which would give Comcast a 40% share of cable broadband homes," Crockett wrote. "So we see no reason for Netflix to accept a deal that is anything less than benign for Netflix."

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